Price Risk Management in Extension Beef Carcass Evaluation Programs: The Georgia Beef Challenge Experience

1. Price Risk Management in Extension Beef Carcass Evaluation Programs: The Georgia Beef Challenge Experience R. Curt Lacy, Patsie Cannon, Jim Collins, John C. McKissick, and Robert L. Stewart Department of Agricultural & Applied Economics, UGA Department of Animal & Dairy Sciences, UGA Georgia Cattlemen’s Association

2. Thanks to our partners • Georgia Cattlemen’s Association • Georgia Department of Agriculture • Iowa State University • Tri-County Steer Carcass Futurity (TCSCF) • USDA – Agricultural Marketing Service

3. Highlights of the Georgia Beef Challenge • Began in 1991 as a way for producers to gather information regarding the type of cattle they produce • Partnership between UGA, GA Cattlemen’s Association, GA Department of Agriculture/USDA-AMS, and other industry partners • Goals of the GBC • Improve the marketability of Georgia-bred cattle by establishing a database of feedlot performance and carcass information • Provide educational information to Georgia cattlemen regarding the carcass merit of their genetics and explore the feasibility of retained ownership.

4. Growth of the Georgia Beef Challenge

5. How Does it Work? • Producer completes and mails consignment form • Producer is told when and where to deliver his calves • At delivery cattle are weighed, graded, and assigned a market price • Calves are shipped to IA • Members of the Tri-County Steer Futurity (TCSF) feed the calves • The animals are harvested and marketed on a carcass basis • Carcass and production data are returned to producers along with a check (usually)

6. History of Risk Management in the GBC • In early years done on an ad-hoc basis • As numbers grew so did the RM implications county agent began doing projections and handling RM after consulting with GBC personnel & consignors • He soon realized there had to be a better way • About 3 years ago a RM Committee was formed to handle RM for the program

7. Georgia Beef Challenge Risk Management Plan • Risk Management Committee comprised of extension economists, beef specialists, and producers • Consignors approve pricing objectives at annual meeting • RMC implements the plan

8. Pricing Objectives for 2004-2005 • Lock in a $50 profit when available • Buy enough protection to lock in value of cattle when they left GA • Do whatever is necessary to limit losses to $50/head

9. Making Decisions • Patsie Cannon sends a report on the numbers, weights, and sexes of cattle when they are shipped. • Curt Lacy uses UGA Custom Finishing Budgets to estimate breakevens and estimated profits. • Risk Management committee discusses and evaluates alternatives via phone or e-mail • A decision is made and implemented via our broker in Iowa

10. Caveats • Producers with a futures contract worth of cattle in the same pen can do their own risk management • They can consult with the risk management committee regarding alternatives • They can ask the risk management committee for assistance in implementing their plan • They can use our broker in IA

11. Alternatives Utilized • Hedge • Put option • Synthetic put • Fence • ½ hedge

12. Example Worksheets • Example Report 1 • Breakeven Example • Final Report

13. Profits From Feeding

15. Lessons Learned – General • Our genetics are as good as any • Preconditioning pays when it comes to shipping cattle • Price risk management is important

16. Lessons Learned - Risk Management • It is better to have a plan and to let “experts” implement the plan • Producers need to a have a clear understanding of what they are agreeing to • It is imperative that breakevens be calculated for every pen • Past feedlot and carcass performance do play a role in breakevens • Communications between feedlots, broker, and risk management committee are crucial

17. Lessons Learned – Risk Management • There is a HUGE difference between a textbook hedge/option and the real world • Managing price risk on the input side is less straightforward • Hard to estimate physical needs • Timing of feed needs is difficult • Some type of cash strategy probably works best

18. Lessons Learned – Risk Management • Live Cattle options are different from grains • Often there is very little liquidity at the strike price you want • Sometimes delivery dates make you exit early • Timing of sales can create “opportunities” for hedging or options

19. Changes in Attitudes, Latitudes, and Behaviors • Some producers have: • Learned that not everyone can be above average • Decided to focus on raising high quality feeder calves • Changed genetics • Started preconditioning and vaccinating • Developed their own risk management plans

20. Other Developments • Resulted in cattle marketing workshops • Some collective feeder cattle sales now require some form of carcass data • Some producers raising discounted feeder cattle have begun retaining ownership • Cattle shipped in 2004-2005 have EID tags • USDA-AMS FSMIP Grant

21. Summary • GBC has been a very educational program for beef cattle producers • Risk management makes the carcass information gathering process less expensive • There is considerable difference in teaching risk management and actually doing it!!

22. Questions?